How Your Mortgage Affects Your Credit Score

FG Trade/GettyImages; Illustration by Hunter Newton/Bankrate

How applying for a mortgage affects your credit score

Getting preapproved or applying for a mortgage usually lowers your credit score, but not by much and only temporarily. To determine whether your credit qualifies you for the mortgage, the lender pulls your credit report, which registers as a hard inquiry. These types of inquiries lower your score for a short time.

If you’re concerned about affecting your score and you’re just starting to think about buying a home, consider getting prequalified instead of preapproved. A prequalification usually only creates a soft inquiry on your credit report, so it won’t affect your score. It can help determine your approval odds, how much house you can afford and the rates you might qualify for. 

Confirm with your lender whether its prequalification process involves a hard pull — some lenders use the terms “preapproval” and “prequalification” interchangeably. And keep in mind that, before you make offers on homes, you’ll want to get preapproved.

How having a mortgage affects your credit score

Your score will likely increase over time as you start making timely mortgage payments. Here’s why:

• Payment history: Your payment history is the most significant factor in your FICO score. When you apply for new credit, lenders typically look at your last two years’ worth of payments. “In the long run, if you consistently make your monthly mortgage payments on time, this will be a serious boost to your credit score, as you’ve proven you can manage this large loan,” says Tabitha Mazzara, director of operations at Mortgage Bank of California.
• Length of credit history: Most mortgages are longer-term loans, which can benefit your score in terms of your credit history length.
• Credit mix: Your credit mix also improves if you borrow a new type of debt. Lenders and creditors like to see a combination of installment loans and revolving accounts, such as credit cards. The more diversified your credit profile, the better the likelihood of a bump to your score. “If you have a mortgage, credit cards and an auto loan, for example, and you’re managing them all, that’s a good credit mix,” Mazzara says.

If you decide to refinance your mortgage, your credit score could drop temporarily due to another hard inquiry on your report. It could also dip because you’ll be paying off your existing mortgage with a new one, potentially shortening the average age of your credit accounts. However, your score should start to increase again once you begin making payments on the new loan.

How paying off your mortgage affects your credit score

Paying off your mortgage can lower your credit since you’re no longer managing significant debt and your mix is reduced.

“Eliminating the mortgage will decrease the ‘variety pack’ the [credit] bureaus like to see,” Mazzara says. “But the reduction [in your score] should be small — far smaller than the impact of being 30 days late, for example.”

How a mortgage can harm your credit

If you miss a mortgage payment, your credit score can take a significant hit. And late payments can linger on your credit report for up to seven years, though the impact diminishes over time. This can make it much harder to obtain credit, including another mortgage, in the future.

“If you are more than 30 days late on a payment, that will dent your score considerably, and a foreclosure will really send it into a tailspin,” Mazzara says. “It’s a very serious matter for the credit bureaus, so avoid this like the plague.”

Be mindful that most mortgage lenders offer a 15-day grace period before assessing a late payment fee. As soon as you sense trouble with making payments, contact your lender or servicer to discuss your options.

How to improve your credit for a mortgage

Here are our best tips to improve your credit score for a mortgage:

1. Know your credit score and history. You can check your credit reports with Equifax, Experian and TransUnion for free on a weekly basis at AnnualCreditReport.com. This is an opportunity to examine the reports for any inaccuracies, especially regarding late payments or closed accounts. If you spot an error, dispute it as soon as possible. Here’s how.
2. Pay all bills promptly. It’s essential to keep all accounts in good standing, as a missed or insufficient payment can harm your credit score, with delinquencies lingering on your credit report for up to seven years. If you’re late but still within the grace period, reach out to the creditor immediately to discuss resolving the issue and possibly waiving the late fee. Strive to consistently meet payment deadlines going forward.
3. Reduce your debt balances. Your credit utilization ratio, which compares the amount you owe to your total available credit, carries significant weight, comprising around one-third of your score. Lowering this ratio helps raise your score, so concentrate on paying down balances to below 30 percent of the total credit line.
4. Avoid additional debt. Whenever possible, refrain from opening new credit card accounts or taking out additional loans right before applying for a mortgage and throughout the application and underwriting phases. Similarly, avoid closing old accounts, as doing so may increase your utilization ratio, negatively affecting your score.

FAQ

• How far back do mortgage lenders look at credit history?

  Typically, mortgage lenders look at the last two to seven years of your credit history before approving or denying your loan. That means anything that happened before then will not be assessed in their decision, including bankruptcy.